You’re responsible with your credit cards – you use them often, and you pay them off on time. But when a new card or loan with desirable terms and rewards catches your eye, you’re surprised to find that your loan request was denied. What went wrong, and where do you go from here?
Problem: pyramiding debt
You accumulate pyramiding debt when you repeatedly pay off existing debt with new credit. At some point, an application will be denied because this trend indicates that you may not have the capital to handle the debt.
The term is also used to identify another credit application trend that lenders find suspicious. Let’s say you have $20,000 in credit and are utilizing $10,000. That’s a credit ratio of 50 percent. In order to keep your credit ratio under 30 percent, you take out another credit card and up your available credit to $40,000. But then life happens. You find an amazing deal on a flat screen, or an incredible vacation package. Now you’re using $20,000 of your available $40,000, shooting your ratio back up to 50 percent. This time, when applying for more credit, you’re likely to be denied for pyramiding debt. While you haven’t actually paid off old debt with new and you’re consistently making your payments, the trend your credit is taking doesn’t look promising to lenders.
The Fix: Take it easy on the purchases. Apply some capital toward your debt and get your ratio in check. This way, when you apply for credit, lenders will see that you have the income (and the discipline!) to handle it.
Problem: too much open credit or too much potential debt
When you have an excessive amount of credit available and only a modest income, lenders may worry about offering you a loan that your resources can’t support. Fortunately, conservative lending practices don’t have to prevent you from securing that loan.
The fix: Talk to your lender about what would make them feel more comfortable approving your request. Perhaps they want you to pay down some of the debt load you’re currently carrying, or maybe their worries will be assuaged if you lock down a pay raise. If you do decide to close cards, though, be sure to close your most recently opened accounts, since older accounts are more valuable to your credit score.
Problem: insufficient recent credit
Unfortunately, having credit cards and past loans may not be enough. To give lenders confidence, they need to be in active use. If your student loan is in deferment or if you haven’t used your current credit cards in six months, a lender may deem your recent credit history to be inconclusive of your ability to pay. Remember, recent credit history carries more weight than past history. This can be a good thing if you’re recovering from a dip, but it can work against you, too.
The Fix: Everyone starts out with no credit, so this isn’t insurmountable. If you have credit or can make payments toward your loan, start doing so. However, if you really need a new credit card, try applying to local lenders like credit unions or your bank.
Problem: worsening economic conditions in your area
Talk about a one-two punch. You’re turned down for a loan and given a bad financial forecast. If your credit and income are solid, the lender may just have excessively high standards for loans at the moment.
The Fix: Don’t panic – just wait it out. While lots of credit inquiries will hurt your score, 2 or 3 in a year are considered normal.